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Back in February, a WLF Legal Pulse post applauded the food and beverage industry’s proactive move to create uniform standards for “front-of-package” (FOP) labeling with its “Nutrition Keys” program. We also noted the predictable opposition of nanny-state activists and academics who cringed at the non-governmental standard setting and assertion of commercial free speech rights. One of those naysayers has now gone from being quoted in various media outlets to expressing his views in the once-venerable New England Journal of Medicine (NEJM) (hat tip to FDA Law Blog for flagging this).

“Front-of-Package Nutrition Labeling — An Abuse of Trust by the Food Industry?” appears in the June 22 issue of the NEJM. Authors Kelly Brownell of Yale and Dr. Jeffrey Koplan of Emory (and former Centers for Disease Control Director) launch a vigorous assault on the Nutrition Keys program and the food and beverage industries in general. As any good professional activist would, they self-rightously stand in the shoes of consumers to decry how food companies have violated our “trust” by taking action while government dithers along studying the issue. What’s trust got to do with it if companies band together and agree to one approach? It’s also not clear how, as Brownell and Koplan argue, the Nutrition Keys could “preempt the imposition of an alternative system.” If government wants to mandate standards, industry’s voluntary actions won’t stop it.

The food and beverage industries true transgression, it seems, was in not embracing Brownell and Koplan’s ideas for FOP labeling. What would they prefer? –Scarlett Letter-like traffic lights which through their stark images will stigmatize foods and drinks. What do such stop, caution, and go symbols tell consumers? Always eat this? Don’t ever eat that? Even the Food and Drug Administration has resisted this approach.

Ironically, the NEJM diatribe came out around the same time as two U.S. Supreme Court rulings which touch upon two issues raised by Brownell and Koplan. If, as they hope, federal regulators move to displace disfavored commercial speech with government-mandated speech, First Amendment challenges may arise. In last week’s Sorrell v. IMS Health Inc. ruling, six justices strongly reaffirmed the high burden governments must overcome when curtailing economically motivated speech with which it disagrees.

In Brown v. Entertainment Merchants Association, Justice Scalia’s majority opinion rejected the notion that a law banning the purchase of “violent” video games by “minors” was necessary to protect the interests of parents in California. Why? Because the gaming industry, through the Entertainment Software Rating Board, voluntarily labels games based on their content. As Justice Scalia notes, the Federal Trade Commission has positively remarked on this self-regulatory system, and, he continued, it “does much to ensure that minors cannot purchase seriously violent games on their own, and that parents who care about the matter can readily evaluate the games their children bring home.”

While regulation-first advocates like Professor Brownell and Dr. Koplan are busy urging government to further eat away at consumers’ freedoms, free enterprise is devising and implementing solutions that provide accessible, useful information which we can use to make personal choices. And if consumers think companies are being “untrustworthy” in offering that information, we can vote with our feet and our money, by buying something else.

In a Legal Pulse post last November, What’s that Buzz? It’s the Sound of Class Action Lawyers Celebrating their Impending Fees, we discussed the settlement of a lawyer-driven lawsuit alleging Google violated various federal and state laws by not sufficiently protecting customers’ privacy in its “Buzz” networking service. Judge James Ware of the Northern District of California has since been weighing objections to the settlement; what amount of attorneys’ fee he should reward; and which “organizations focused on Internet privacy policy or privacy education” would receive a portion of the settlement funds through the cy presprocess. Judge Ware issued his final order yesterday, one which makes the plaintiffs’ lawyers and a number of well-funded activist groups richer, but provides no monetary benefit to any class members (other than the “class representatives,” who each got a whopping $2,500).

It’s no surprise, of course, that no damages were awarded since, as the class counsel pointed out in arguing for the cy pres distribution in the settlement,

[N]one of the objectors identifies a single class member who suffered out-of-pocket damages from the release of Buzz. Indeed, not one of the objectors had shown any specific individual harm due to the operation of Buzz.

Quite a racket, these class actions: Uninjured plaintiffs + a defendant anxious to settle = millions in attorneys’ fees and donations to activist groups (which in turn = more litigation).

The attorneys had asked for $2.55 million in fees; the judge awarded them$2.13 million. No surprise there. There were some surprises, however, among the cy pres award recipients. A total of 77 organizations applied for the available $6.1 million, which were whittled down to 12 groups by the counsels for both sides. One advocacy group that applied but didn’t make the cut, the Electronic Privacy Information Center (EPIC), complained loudly to the court, lodging accusations that the selection process was biased in favor of groups “that are currently paid by [Google] to lobby for or consult for the company.” Judge Ware didn’t comment on the validity of that claim, but he nonetheless decided that there was “no good cause to exclude EPIC” from the list, and awarded them $500,000.

Other recipients range from advocacy and educational powerhouses like the ACLU ($1 million); Brookings Institution ($165,000); Electronic Frontier Foundation ($1 million); and Berkeley Law School (combined $700,000); to smaller groups such as “Youth Radio” ($50,000) and YMCA of Greater Long Beach ($300,000).

The most interesting recipient, however, was an organization nominated directly and independently (as he can under his inherent judicial authority) by Judge Ware: the Markkula Center for Applied Ethics at Santa Clara University. Judge Ware is listed as a Lecturer at Santa Clara law school. He awarded the Center $500,000.

There are few better cases to illustrate what’s wrong with the cy pres process and the easy abuse of the class action device than the Google Buzz settlement. Why were these lucky 14 settlement fund recipients chosen and not others? What criteria were used to choose them? How will the $6.1 million provide an “indirect benefit” (as the judge put it) to the faceless, nameless plaintiffs in the suit? What amount of scarce federal budgetary dollars were spent adjudicating this shakedown? Questions, we think, which are worthy of further inquiry but ones we know won’t be answered any time soon.

Section 3(f) of the Securities and Exchange Act of 1934 provides a clear mandate for Securities and Exchange Commission (SEC) rulemaking:

“[T]he Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.”

The SEC mission is to protect investors and the securities markets. Last year, Congress decided to alter and expand this mission. But it didn’t amend the Exchange Act. Instead, Congress made its changes through two obscure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These sections convert the SEC into a foreign policy-making agency. Dodd-Frank Sections 1502 and 1504 require new SEC rules which will force some industries doing business overseas to disclose information which, in turn, can be used to pressure foreign governments into altering their behavior or impose new regulations. continue »

As illuminated in an April 28 article in Bloomberg Business Week, budget cuts in the states have had a staggering impact on state courts. The article notes the creation of a task force including the American Bar Association as well as prominent plaintiffs’ lawyers, defense attorneys, and corporate counsels which will compile data and lobby for more funding.

We have another idea. As WLF first suggested over thirteen years ago in one of our In All Fairness columns in The New York Times, perhaps it’s finally time to consider a Litigation Excise Tax. A 15% tax could be applied to the fees which result from any single litigation matter where the attorneys’ fees are in excess of $400,000. The resulting revenue could be channeled to benefit the administration of justice. As we argued in that Times column:

Lawyers feed off of a very willing host – the legal system – producing costs for that system but giving very little back to it in return.

State and federal governments certainly knows how to extract revenue through excise taxes from businesses which policy makers feel benefit too handsomely from their products. For instance, a little-known section of the federal health care reform law (The Affordable Care Act), requires medical product companies which sell their treatments to the Medicare program to pay an excise tax (more on that here). The tax applies to prescription medication companies, not generic drug producers. Excise taxes are also used to discourage consumption of “disfavored” products, such as alcohol and tobacco.

A Litigation Excise Tax not only would help fund the state courts, but it might also achieve the added benefit of discouraging meritless litigation which occupies valuable judicial resources and often benefits no one but the attorneys. Maybe we would have less litigation like the recently settled class action lawsuit against Google for alleged harms caused by its Google Buzz service. As we’ve previously noted at The Legal Pulse, that suit led to zerorestitution for the class members, and the lawyers are asking for $2.55 million in fees.

Such a levy might be the right idea for states looking for funds to keep their courts open, or it might be just another outrageous tax on commerce. But isn’t something that might improve everyone’s access to justice worth considering?

Much to the chagrin of plaintiffs’ lawyers, federal law requires that a judge dismiss a securities fraud class action if the complaint doesn’t include “particularized facts giving rise to a strong inference of intent to deceive by each defendant.” One tactic of recent vintage that securities fraud lawyers utilize to keep their suits alive is to claim that a confidential witness has certain information that demonstrates intent to defraud. This can work unless, as happened in one case in Illinois federal court, the lawyers make the mistake of disclosing the witness’s name, and then the witness in turn disavows knowledge of the supposedly incriminating information which the plaintiffs’ lawyers attributed to him.

As discussed in a Wall Street Journal editorial, Boeing Beats the Trial Bar, last week, a city pension fund played the role of plaintiff for (as the judge put it) “eager class action plaintiffs’ lawyers,” filing suit against Boeing for allegedly deceiving investors about developments in the production of a jumbo jet. After Judge Suzanne B. Conlon initially threw the complaint out of court for failing to meet the pleading requirements, the lawyers refiled, claiming that a Boeing “insider” had detailed information including documents that demonstrated fraud. On the basis of this new information, Judge Conlon allowed the suit to proceed.

The problem was, once the plaintiffs revealed the identity of the “insider,” the defendants interviewed him, and low and behold, he didn’t in fact work for Boeing; he didn’t possess any insider knowledge or documents; and he didn’t even meet or speak with the plaintiffs’ lawyers before the defendant’s deposition. The plaintiffs’ lawyers were forced to argue their own witness was lying; the witness retorted that the investigators for the lawyers were the ones telling lies.

Judge Conlon, who must have felt quite burned after having initially allowed the case to go forward based on the claims of this confidential witness, reversed herself in a short and to-the-point nine-page ruling, City of Livonia v. Boeing and threw out the complaint.

What happened in City of Livonia sounds troublingly like other recent instances of alleged and actual plaintiffs’ lawyer fraud. In the still-raging environmental litigation against Chevron in Ecuador, a plaintiffs’ expert gave sworn testimony that he did not prepare or authorize reports on environmental damage in Ecuador that the plaintiffs attributed to him. In litigation against Dole Food Company, a judge found that plaintiffs’ lawyers recruited and instructed Nicaraguan workers to mislead the court as to their supposed injuries.

A little over six years ago, WLF published an op-ed in its In All Fairness column series in The New York Times entitled “An Idiot’s Guide to Class Actions.” It seems we’ll have to add another item to the Securities Class Action Plaintiffs’ Lawyers’ Playbook the piece lays out:

If the judge doesn’t buy your initial tale of fraudulent behavior, adjust your story to include a confidential witness who has inside information that proves something untoward was afoot. Keep his name confidential and do all you can to prevent the class action defendant from questioning him.

For cause-oriented crusaders in and outside of government, speech has long been a favorite means to an end. Not a particularly effective means, but a means nonetheless. Policymakers can point to speech restrictions as proof that they are trying to “do something” about a perceived problem. As free enterprise advocates, we are most troubled by those who seek limits on commercial speech as a proxy for addressing supposedly negative consumer conduct or “disfavored” products. Commercial speech is quickly becoming the anointed fall guy in the national battle against obesity, a battle where, paradoxically, more information is one of consumers’ key weapons. But that information, according to activists, must come from the government or be tightly controlled by the government. Such nanny policy preferences, and a desire to advance broader agendas, are on display in activists’ opposition to voluntary efforts by the food industry to provide information on the front of food packages. continue »

For the past month, Americans interested in the making of law and policy have understandably focused their attention on the congressional elections. Makes sense, since Congress is where our most important national policies are debated and laws are made, right? Not always.

For some time now, the process of making rules for millions of American consumers, employees, shareholders, etc. has increasingly deviated from the approach we learned in Civics 101. Consider what has been developing in the so-called war on obesity, a well-intentioned effort which is unfortunately being used by some activists in and outside government as a platform to demonize businesses and the products they offer. Driven by the paternalistic belief that consumers can’t manage their own diets, governments at the state, county, and even city level are taking restrictive action, while federal agencies are quietly planning larger scale moves that will impact our freedom to choose what we eat and drink.

Step Away From That Margarine! Late last month, a small barbecue stand in Baltimore (ironically called “Healthy Choices”) run by a Korean immigrant was fined $100 for using a margarine that ran afoul of the city’s ban on trans-fats. According to this report, the owner had been warned previously, but the replacement he chose for the offending margarine (at twice the cost) wasn’t in compliance. The ban, which of course doesn’t reduce the amounts of trans-fat in store-bought products, is similar to ones enacted in Montgomery County, Maryland, Philadelphia, and New York City, whose leaders were similarly desperate to be seen “doing something” about obesity. Will city ordinances setting acceptable levels of salt and refined sugar be next?

An important aside: National food producers and restaurants, no doubt, have already taken note that Baltimore’s Health Commissioner at the time of the trans-fat ban passage was Dr. Joshua Sharfstein, now Principal Deputy Commissioner of the federal Food & Drug Administration (FDA).

Back Off From That Happy Meal! Inspired by national nanny organization Center for Science in the Public Interest’s (CSPI) threat to sue McDonald’s for its “unfair, deceptive, and illegal” offering of toys in children’s meals, San Francisco’s Board of Supervisors city council last week voted to ban the use of prizes in meals which didn’t meet certain nutritional criteria. In support of the ordinance, a CSPI lawyer rather morosely said, “McDonald’s is the stranger in the playground handing out candy to children. It’s a creepy and predatory practice that warrants an injunction.” Such hyperbole is sadly common when spoken in support of laws such that passed in San Francisco’s. Is there any credible scientific support demonstrating a link between the availability of toys and kids’ desire to have those meals, or proof that kids are eating those types of meals to such an extreme extent as to lead to dangerous weight gain? No proof, no problem, just demonize, regulate, and sue.

Stop! That Cereal Is Loaded. For several years now, some food producers have been supplementing the government-mandated back or side panel labels with front-of-package panels that highlight certain nutritional information. That such labeling is being done voluntarily, isn’t standardized, and stresses positive data all drew the ire of “consumer advocates,” and the attention of FDA, which is now pursuing a front-of-package labeling initiative. FDA is sponsoring a two-part study by the federal Institute of Medicine to provide a sheen of scientific legitimacy to their drive toward regulation. The first part of the study, not surprisingly, concludes that calories, saturated fat, trans fat, and sodium should be included in any effective front-of-package label. Also, in a statement that consumers should find insulting, the study also criticized the front-labeling of fiber because it ”may encourage consumers to eat foods that have had fiber added rather than increasing their consumption of naturally occurring, plant-based foods.” In other words, more information on things that are good for you is in fact bad for you.

The food industry trade group announced in late October that it would be jointly creating a more standardized front-of-package label. Food nanny activists’ reaction was predictable. New York University Professor Marion Nestle and CSPI’s Michael Jacobson declared that any industry-run system is inherently suspect and insufficient. They would prefer graphic labels akin to what the United Kingdom’s Food Standards Agency requires – alarming red, yellow, and green “traffic lights.” Such a Scarlet Letter scheme is more likely to stigmatize labeled products and scare off consumers than it is to relate useful information, making it especially vulnerable to First Amendment challenges. Imposing stop signs on product packaging is, under Supreme Court commercial speech precedents, far more extensive than necessary to achieve the government’s goal of providing standardized nutritional data.

Another aside: The Institute of Medicine (IOM) seems to be regulators’ and activists’ favorite government entity for quietly advancing their paternalistic agendas. As a law firm memo relates, IOM’s Standing Committee on Childhood Obesity Prevention held a workshop on October 21 examining “legal strategies” to reducing obesity. David Vladeck, an activist turned regulator from the Federal Trade Commission, warned businesses that the Commission could rely upon its controversial “unfairness” jurisdiction to sue food marketers without having to prove a causal link between marketing and obesity. Other speakers included CSPI’s Michael Jacobson on a panel entitled “Using Litigation to Make Change,” and Vermont Attorney General William Sorrell, who floated the possibility that his state might pursue new taxes on sugar-sweetened beverages.

In an opinion released last week, the U.S. Court of Appeals for the First Circuit reduced two lawyers’ contingency fee from $292,000 to $50,000 — a positive, and rather ironic, message against excessive attorneys’ fees.

The ruling (U.S. v. Hawthorn) emanates from a whistleblower case in which four employees of the Overseas Shipholding Group, Inc. (“OSG”) reported incidents of the company’s pollution violations to the United States Cost Guard. When discovered that the employees could potentially receive whistleblowing payments, two of them — Benedict Barroso and John Altura — contracted attorney Zack Hawthorn for representation. Barroso and Altura agreed to pay Hawthorn the standard 33 percent contingency fee if successful in the suit.

Barroso and Altura won their whistleblowing claim and reward. The U.S. government filed a motion with the district court judge for a reduction in Hawthorn’s attorney fee, arguing it was unethically excessive. The district court agreed with the government, and instead of being rewarded $292,000, Hawthorn could only collect $25,000 from Barroso and nothing from Altura. The court reasoned that the full 33 percent fee was excessive considering the limited effort and risk involved in the case. Furthermore, the court found Hawthorn’s fee so significantly reduced the payment to the whistleblowers that it would erode the financial incentive Congress enacted to encourage whistleblowing. continue »

Two elite plaintiffs’ law firms learned recently that in securities fraud class action litigation, the cost of failing to quit while you are behind can be very high.

In a September 20 opinion in In re Star Gas Litigation, federal Judge Janet Bond Arterton deployed a little-used section of the Private Securities Litigation Reform Act (PSLRA) and imposed mandatory sanctions under Rule 11 of the Federal Rules of Civil Procedure. Congress intended to reduce frivolous private securities litigation through the PSLRA and Section 78u-4 requires the judiciary, which has long been hesitant to impose sanctions, to “include in the record specific findings regarding compliance by each party and each attorney . . . with Rule 11(b).” It also states that the court “shall impose sanctions on such party or attorney in accordance with Rule 11″ if the judge finds a Rule 11 violation.

The plaintiffs alleged that Star Gas made false and misleading statements about improvements to the company’s heating-oil subsidiary, including creating of a customer call center. Judge Arterton dismissed the class action in August 2006, plaintiffs tried to amend their complaint, at which time Star Gas moved for a Rule 11 inquiry. According to an American Lawyerarticle, the defendant’s lawyer offered to drop the Rule 11 motion if the plaintiffs ended their efforts to amend their complaint. The plaintiffs refused, Judge Arterton denied both the plaintiffs’ motion to amend and the defendant’s Rule 11 motion, and the plaintiffs appealed her dismissal to the U.S. Court of Appeals for the Second Circuit. The Second Circuit affirmed, and then Star Gas renewed its request for Rule 11 sanctions.

Judge Arterton’s opinion lays out her thorough assessment of whether plaintiffs’ claims were not “warranted by existing law” or that “no competent attorney could form a reasonable belief that the pleading is well grounded in fact.” The judge cites often to her 2006 opinion dismissing the plaintiffs’ complaint, which explained how the timing for Star Gas’s alleged misstatements did not line up factually with information in the public record, such as Star Gas’s securities filings. Such “timing impossibilities,” the judge wrote, left plaintiffs’ claims “utterly lacking in support,” language which she repeated throughout the opinion. Judge Arterton found, as required under Rule 11, that plaintiffs’ violations were “substantial,” thus creating “a presumption for awarding all fees and costs for the entire litigation as sanctions.” The two law firms will have an opportunity to convince the judge that the full sanction will impose an “unreasonable burden” on them.

One passage in the In re Star Gas ruling strongly reveals Judge Arterton’s frustration with the plaintiffs’ lawyers and their actions in the case:

Additionally, Plaintiffs were put on notice of the defects in their allegations from the pre-filing conference, in which Defendants were required to summarize all bases for their forthcoming motion to dismiss to afford Plaintiffs a chance to amend, which Plaintiffs declined. Plaintiffs did not seek leave to file an amended complaint to address those defects until after the Court dismissed all of their claims.

Hopefully, Judge Arterton’s ruling will encourage more targets of securities class action strike suits to invoke PSLRA §78u-4 and will diminish federal judges’ long-standing reluctance to impose Rule 11 in cases like In re Star Gas, where such sanctions are entirely warranted.

In an amicus brief filed yesterday in support of American Electric Power and other utilities companies in the U.S. Supreme Court, President Obama’s Department of Justice stunned environmental activists by opposing the imposition of new tort liability on energy companies that discharge carbon dioxide into the atmosphere.

The United States has asked the Supreme Court to vacate the Second Circuit’s decision in AEP v. Connecticut, in which the Second Circuit affirmed the right to sue carbon dioxide emitters under a common law theory of nuisance. In September 2009, the appeals court ruled that plaintiffs could sue American Electric Power Co. and five other leading utility companies for their carbon dioxide emissions (which had been already been approved by government issued permits). The plaintiffs, which included several state attorneys general, claimed that the defendants’ conduct contributed to global warming, which in turn would cause sea levels to rise and “will inundate . . . much of New York City’s infrastructure, including airports, tunnels, sewers, and subway stations.”

Many legal policy experts, including the Washington Legal Foundation, have long insisted that the debate over the effects of carbon emissions on the rise in global temperature is strictly a political question that should not be decided in the courts. The district court below agreed, dismissing the case on political question grounds. On appeal, the Second Circuit reversed, but the tide may yet turn again.

Specifically, the brief of the U.S. Solicitor General asked the Second Circuit to vacate the Second Circuit’s ruling and defer to the administration’s desire to regulate greenhouse gases through the congressionally enacted Clean Air Act. continue »